Oracle Corp. is expected to mark a major milestone in its transition from traditional software sales to the cloud when it reports earnings after the bell on Thursday.

About two weeks before its 2017 OpenWorld conference in San Francisco, Oracle /quotes/zigman/19452757/compositeORCL-0.10%
is poised to show more revenue from cloud sales than new software licenses for the first time. In the first quarter of its 2018 fiscal year, Oracle is expected to report total cloud revenue of nearly $1.5 billion, while new licenses for on-premises software is expected to fall lower than $1 billion.

JMP Securities analyst Patrick Walravens, who has a “Market Perform” rating and no price target on Oracle shares, believes the transition helps make Oracle more attractive as an investment because earnings will be more predictable.

“As cloud continues to represent a larger percentage of the overall business, it positions Oracle to perform more consistently,” Walravens said in a note. “For example, the company has surpassed consensus expectations for non-GAAP EPS and revenue in each of the last two quarters after having missed consensus expectations for those metrics in six and 13 of the previous 16 quarters, respectively.”

What to expect

Earnings:
Oracle is expected to report fiscal first-quarter adjusted earnings of 60 cents a share, compared with 55 cents a share in the year-ago quarter, according to analysts surveyed by FactSet. The consensus on Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of 63 cents a share. The company forecast earnings of 59 cents to 61 cents a share.

Revenue:
Analysts on average expect Oracle to report revenue of $9.03 billion, up from $8.61 billion for the first quarter, according to FactSet. FactSet contributors on average expect revenue of $9.06 billion, and the company has forecast revenue of $8.96 billion to $9.13 billion. Total cloud revenue is expected to surge 50% to $1.48 billion, up from $969 million in the year-ago period before Oracle acquired NetSuite. Analysts, on average, expect total on-premise software revenue to be flat at around $5.82 billion.

Stock movement:
Oracle shares, closed at a record high of $52.80 Wednesday, the third record close in as many sessions, gained 0.1% in morning trade Thursday toward another record. Shares of Oracle have gained 37.4% this year, compared with a 19.6% gain in the Nasdaq Composite Index /quotes/zigman/12633936/realtimeCOMP+0.15%
and an 11.5% gain for the S&P 500 index. /quotes/zigman/3870025/realtimeSPX+0.0072%

Of the 36 analysts who cover Oracle, 26 have “Overweight” or “Buy” ratings on the stock, while nine have “Hold” ratings and one analyst has a sell rating, according to FactSet. The average analyst price target is $55.50, FactSet reports, implying 5.1% upside from Wednesday’s closing price.

What analysts are saying

Analysts don’t seem to have many concerns about the decline in new software licenses, instead focusing on the cloud growth.

“Overall, while on-premise license declines will likely steepen in 1Q following an unusually strong 4Q, we think Oracle carries a lot of momentum in Cloud; and combined with strengthening margin expansion, we think the stock should continue to work,” analyst J. Derrick Wood wrote in a recent note. Wood has a “Buy” rating and a $55 price target on Oracle, and expects earnings of 61 cents a share.

One point of caution, Woods notes, is Oracle’s deals with the U.S. government. While a seasonally slow quarter for such deals, Woods said he’s seen 24 seven-figure deals with the federal government for this quarter as opposed to 37 in the year-ago quarter.

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Stifel analyst Brad Reback, who has a “Buy” rating and a $52 price target on Oracle, also sees cloud-based revenues leading to a healthier overall company.

“Given the full-court press Oracle is making towards the cloud, it should be no surprise that this also means that license revenue growth should likely continue declining in the double digit range in coming years,” Reback said. “Despite this headwind, we think maintenance revenue should continue to see at least modest single digit growth given high renewal rates. The bottom line is that even with the decline in license revenue due to the shift to the cloud, we think operating margins, operating income, and cash flow should all grow in FY18.”

Jeffries analyst John DiFucci, who has a “Buy” rating and a $60 price target on Oracle, expects strong results in what is a seasonally slow period.

“We expect the fiscal first quarter to again reflect more moderate declines in license than was experienced prior to the fourth quarter, solid maintenance renewals, and good new cloud signings,” DiFucci wrote. “However, the mix could be skewed more toward cloud (versus on premise) depending on how some large deals are accounted for.”

Oracle may hold back any significant announcements in Thursday’s report and conference call, as its annual OpenWorld conference in San Francisco is around the corner, beginning Oct. 1 and running through Oct. 5.

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